Business valuation of spa and salon: Tips, updates, and guidance on business valuation

 Are you planning to buy a spa and salon?

Or

Do you plan to sell off your spa and salon?

If your answer is yes, make sure you do your homework and accurately measure the value before signing on the dotted line, or you’ll end up either spending too much or getting too little.

There are several factors that can influence the valuation of a spa and salon but in this article, we’ll be concentrating on the 4 common factors that every spa and beauty salon owner should consider in order to increase the value of their business and get the best possible price they’ll need to move up to another business. There are different types of business valuations as well as business valuation methodologies that business owners may not be aware of. Hence, the first step you’ll need to take if you’re thinking of selling your salon or spa is to get a business valuation service from a professional. They’ll give you the best and most comprehensive valuation details while considering the following factors in their valuation process:

Business Profitability

To find out what the seller’s discretionary cash flow (SDC) is within a particular number of years,let’s say 3 or 4 years SDC, the valuators need to look at how the business performed during the recent 3 or 4 years. The SDC comprises the owner’s salary, identifiable benefits, and the bottomline profit. The cash flow average is taken to determine a price.

The profitability of a business is a common and important factor amongst other business valuation factors. Keeping records of the business dealings and identifying all the benefits derived from the business by the owner are all very important considerations. Multiple SDC used in selling salons can vary based on the SDC level.

In terms of looking out for multiple streams of income, offering a few services that will contribute to the bottom line is much easier to manage and far better than having a long list of unprofitable services. What buyers look out for is efficiency and not size. The bottom line profits should be paid for and not top-line revenues.

Staff

The Spa and Salon business is growing very fast and is a widely accepted business in every corner of the world. It matters to know the worthiness of your company so that you can buy and sell your business at the right price.

Here are a few key drivers that potential buyers and investors would weigh before writing you a check for your Spa and Salon.

1. State of spa and salon facility

Buyers place a high value on appearance. It’s a psychological component. No one wants to spend their life savings unless they can be proud of the building’s appearance.

2. Multiple sources of profits

Spas and beauty salons that provide additional services such as waxing and selling beauty items such as shampoos, gels, and aromatherapy lotion and body wash gain higher profit margins.

3. Location

You have the perfect location if your spa and salon are located in a high-traffic, popular spot. It is also a desirable location if the spa and salon are in a region with a high density of people to draw or converted as customers. Finally, if you’ve been profitable for three to four years at your current place, you will be able to get a higher price multiple for your business.

4. Competition

The Spa and salon business has very few barriers to entry. Therefore, as the market becomes crowded with spas and salons on every corner, the less valuable the industry evolves.

Salons can be valued using four different types of valuation processes, as follows:

#1. Asset-based valuation

This formula determines the equity value of a business by subtracting the fair market value of its assets from the fair market value of its liabilities. This method is also known as a “cost-based strategy” since the company value is the same as the cost of purchasing the physical properties. This method is commonly applied on spa and salon that isn’t on the verge of going out of business.

#2. The Income Approach to valuation (Capitalization of earnings)

This approach is best suited for hair salons with consistent and stable earnings growth and a long history of operations. The cash flow forecast for one year divided by a capitalization rate equals the company value under this approach (i.e., the appropriate discount rate less the predicted growth rate).

#3. The income approach to valuation (discounted cash flow)

This approach is practical for both existing salons with low growth rates and new salons with higher growth rates, but it necessitates forecasting future cash flows.

#4. The market approach to valuation

This approach uses market indicators of value, such as publicly-traded comparable spa and salon chains shares and private salon acquisitions. Public company financial metrics or private transaction financial metrics may be used to construct valuation multiples, which are then used to quantify business value.